Important Challenges in the Renewable Energy Sector

Renewable Energy is one of the important topics in the energy sector. This sector is facing a lot of challenges due to some issues. In this article, we are going to discuss and assess some of the major issues faced by the renewable energy sector and also discuss the pathways to tackle those challenges. In topic is very important for exams and students need to focus and read this topic carefully.

Why do we need Renewable Energy?

1. Sustainability: Energy from renewable sources is becoming cleaner, greener, and more sustainable.

2. Employment Opportunities: The introduction of new technology simply means more employment opportunities for the country’s workforce.

3. Market security: From an economic point of view, renewable resources provide a market and create security that no other resource can offer.

4. Power supply: Powering 100% of households 24/7 and sustainable transportation are some of the goals that can only be achieved with sustainable power from renewable sources. 

Major Challenges In Renewable Energy Sector:

Although India has made progress in developing its renewable energy sector, it still faces obstacles. Off-taker risk, lack of infrastructure, lack of financial intermediaries, and lack of investor understanding are the top four challenges to overcome.

1. Buyer’s risk: This is the risk that the buyer will not meet its contractual obligations or that payment will be late or incomplete. Given the poor financial condition of Indian distributors, there is a risk of late or incomplete payments. In 2015, the total distributor debt was approximately $64 billion. 
The buyer’s risk increases the overall risk of renewable energy projects. To address this issue, the government introduced Ujwal DISCOM Assurance Yojana. This is intended to reduce operational inefficiencies and improve the financial performance of distributors. This program takes 75% of a distributor’s debt and converts it into government-guaranteed bonds. 

2. Insufficient infrastructure: Inefficiencies due to a lack of infrastructure for power generation and distribution are major obstacles to foreign investment. It also takes a long time to obtain permits to build and operate powerline evacuation infrastructure. These delays lengthen project construction time, delay the commissioning of new projects, and ultimately delay revenues and profits.

3. Lack of financial intermediaries: Another obstacle for Indian institutional investors is the lack of financial intermediaries in the renewable energy sector. These actors are necessary to provide adequate information about investment opportunities.

4. Limited understanding: Renewable energy is a non-traditional investment destination and potential investors are often cautious due to their limited understanding of the sector. Domestic institutional investors tend to invest in low-risk securities, preferring liquid assets with high credit ratings that are not available for renewable energy projects. 

Pathways to Tackle Challenges:

According to a report by the Climate Policy Initiative, the total investment required for India to reach its renewable energy target by 2022 is $189.15 billion, of which 27% is in wind energy and 37% is in utility-scale. of solar projects will be invested 32% for solar roof projects and 4% for biomass and small hydro projects. India has several avenues to address the four challenges above and meet these investment needs. These include foreign direct investment (FDI), domestic investment, and financial incentives.

1. Foreign Direct Investment: According to the Department of Industry and Domestic Trade Promotion, the cumulative FDI inflow to the energy sector from 2000 to 2020 was about US$15 billion, which is equivalent to about 3% of the total FDI inflow.  The government allowed 100% of foreign direct investment in the energy sector through the automatic route in 2012 and expedited the approval process.
These include investments in hydroelectric power generation and transmission, fossil fuel-based thermal power plants, renewable energy generation and distribution, distribution to homes, industrial commercial users, and electricity trading.  The penetration of unconventional energy sources is increasing in the Indian market, and the participation of foreign direct investment is increasing.

2. Domestic investment:  Since the early 1990s, economic reforms and liberalization measures implemented in all sectors have resulted in significant increases in investment in both the private and public sectors, especially in the energy sector.  The potential investment available for renewable projects is $411 billion, double the required investment target.
Despite heavy government investment, India’s energy sector is more dependent than ever on the private sector as public sector resources focus more on public health and livelihoods. 
Therefore, to attract private investment, the government has encouraged the participation of non-financial banks, launched new investment funds, initiated tariff tightening, released subsidies, and improved the bankability of power purchase contracts. 

3. Financial incentives: Alternative debt instruments such as ‘green’ asset-backed securities could be a potential financial tool to facilitate investment in sustainable energy infrastructure.

By bundling renewable energy assets from different companies and geographies at different points in the operating lifecycle, banks and other financial institutions can hedge the risks associated with individual renewable energy projects. 

Green investment banks “catalyze” private investment in low-carbon assets, provide financing for projects with existing capital reserves, and raise funds through bond issuance and asset-backed securities creation, government-funded It is an institution that
the government issues green bonds through private or public banks, the World Bank, or regional development banks to attract domestic and foreign investors, expand the investor base, and attract private stakeholders interested in clean energy.  

Indian green bonds are in high demand abroad. As many countries seek a green recovery from the recession caused by the Covid-19 pandemic, central banks can inject liquidity into the market, such as through the issuance of green bonds.